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Risk of rate hike rises: What economists say about Canada's inflation surprise


April inflation took economists by surprise, accelerating 4.4 per cent from a year ago, instead of the forecasted 4.1 per cent.

It’s the first time the headline consumer price index (CPI) has picked up steam since June 2022, said Statistics Canada in its release on May 16.

The national data agency attributed most of the increase to higher rents and a rise in the cost of mortgages which soared 28.5 per cent from last year as more homeowners renewed at higher rates.

Higher gasoline prices, up 6.3 per cent, also played a role in the 0.7 per cent increase in inflation in April from March, StatsCan said.


April’s CPI numbers are the last set of “high impact data,” before the Bank of Canada’s next interest rate meeting on June 7.

This uptick in inflation, a better-than expected April jobs report and a rebounding housing market, suggest the economy is heating up again despite the central bank’s efforts to cool it.

Governor Tiff Macklem said in a speech in early May that he was prepared to raise rates further if inflation remains stuck above the two-per-cent target.

Here’s what economists say about the latest inflation numbers and what they mean for the Bank of Canada and interest rates.

Charles St-Arnaud, Alberta Central

“Inflation has clearly peaked but there are signs that the pace of the moderation may be slowing. Moreover, it remains well above the BoC’s target of two per cent, inflation expectations are elevated, and inflationary pressures remain broad and likely sticky. The BoC may find the recent inflation dynamic, as measured by the three-month annualized changes, slightly concerning, but continues to support the case for the BoC to leave its policy rate unchanged at 4.5 per cent for the rest of the year.”

Claire Fan and Abby Xu, RBC

“Inflation in Canada accelerated in April, but has still on balance been easing since peaking in summer 2022. Early signs that the lagged impact of higher interest rates are weighing on economic growth suggest underlying price pressures should continue to ease. The BoC is expected to stay on the sideline for the remainder of the year.”

Jay Zhao-Murray, currency trader, Monex Canada

“As the Bank’s recent communications have placed an explicit focus on the upside risks to inflation, expressed worries about core inflation becoming stuck above three per cent, and left the door open to future hikes if warranted by the data, we believe that markets are underpricing the risk of an additional insurance hike on June 7. Currently, the market-implied odds of a June hike sit at 34 per cent, repriced up from 17 per cent just prior to the report. Today’s CPI report, which was the final piece of high-impact data ahead of the next BoC decision, compounds the evidence we received earlier this month to suggest that the Canadian economy is heating back up. For instance, job growth was twice as strong as economists had anticipated, while the housing market appears to have bottomed, with housing starts, building permits, home prices and sales volumes all surging.”

Leslie Preston, TD Economics

“Headline inflation took a breather on its trek down the mountain in April thanks to surging gasoline prices. We expect the pause will be temporary and inflation will resume heading lower in the months ahead. As outlined in our March forecast, we expect core inflation to continue to decelerate below three per cent year over year in the second half of the year, as does the Bank of Canada.

“Cooler inflation for demand-sensitive services inflation, or “supercore” was the most encouraging development of the report, even though it was somewhat offset by hotter inflation for goods. This reinforces the challenge (Bank of Canada) governor Tiff Macklem has talked about in bringing inflation all the way back to two per cent. This suggests that the BoC needs to remain vigilant to inflation pressures, and may need to hike again if momentum in the domestic economy does not cool as expected.”

Robert Kavcic, BMO Economics

“While the first big leg down in inflation was quick and relatively easy, this next stage is, not surprisingly, proving to be quite a bit tougher.
“Wading through all the moving parts suggests underlying core inflation is settling in around four per cent, which is clearly still too high for the Bank of Canada’s comfort. With policy rates on hold at 4.5 per cent, that leaves us with slightly positive real overnight interest rates (BoC benchmark rate adjusted for inflation). But the ‘core’ question is … is that tight enough? Maybe, but we (and the BoC) will be watching how some of the more interest-sensitive sectors of the economy, and the job market, evolve in coming months.”

Matthieu Arseneau and Alexandra Ducharme, National Bank of Canada

“While April’s data is disappointing, there is still good news for the coming months. Gasoline prices are falling so far in May, which should contribute to a large moderation in annual inflation. Indeed, the months of high inflation following the start of the war in Ukraine will continue to be removed from the calculations, and the negative base effect will disappear from the year-over-year changes. While this morning’s numbers will likely put the central bank on guard, it does not mean that interest rate hikes should be resumed right away. According to our current inflation forecast, real interest rates will be above one per cent in June, the most restrictive rates in 15 years. Such a restrictive monetary policy should be sufficient to significantly calm the Canadian economy in the coming quarters and, as a result, cool inflation.”

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